Aereo ruling won't mean Big Bang for CBS

Some of America's oldest TV networks have accused a 2-year-old start-up of stealing their programming. Here's what may happen if the newbie gets its way.

Any day now, the Supreme Court is expected to rule on a case between the major broadcast networks and Aereo, a company that picks up their signals and sells them as streaming video over the Internet. Among major listed media companies, CBS Corp. has the most at stake given the importance of its eponymous broadcast network, which has reigned number one by viewers for most of the last decade.

Other major media companies that own broadcast networks, including CNBC parent Comcast, also have a big stake in the ruling, but CBS' broadcasts represent a bigger proportion of revenue for CBS Corp.

Source: CBS

Still from CBS' The Big Bang Theory

Should Aereo win, it can continue offering the service in New York and about a dozen other cities where it already operates. In theory, the service can continue expanding across the country, reaching customers who want access to major broadcast networks for as little as $8 per month without paying for a cable package. Aereo, which is backed by Barry Diller's IAC/InterActiveCorp, declined to comment to CNBC.

The success of Aereo itself isn't the real risk for companies like CBS. It would likely take a long time for the service to roll out across the country, and it's unclear how many Americans really want to give up their cable packages. Of the 115.8 million homes with television, all but 11.8 million have some kind of pay-TV package like satellite or cable, according to Nielsen.

The bigger concern is that cable and satellite companies will begin asking why they should pay broadcasters big fees to carry their content if Aereo can simply pick it up for free. Several years ago, broadcasters began charging so-called retransmission fees in exchange for their signals. For CBS, retransmission fees are a huge source of earnings growth, with such payments expected to reach $2 billion by 2020 compared with several hundred million dollars today.

An Aereo victory is unlikely to impact retransmission fee payments anytime soon. Retransmission agreements tend to last a few years and contain step-ups, so income growth is effectively locked in. That also means that earnings estimates for CBS over the next few years aren't likely to budge as a result of the ruling.

More likely, cable companies would need to consider ways to replicate an Aereo-like service of their own a few years down the road. The idea would be to continue offering pay-TV channels while incorporating broadcast networks free of charge.

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CBS CEO Leslie Moonves and IAC/InterActiveCorp Chairman Barry Diller

Such a strategy would have its challenges. Aereo's current model has been allowed because it actually assigns a tiny antenna to each customer and keeps them in a separate location. As David Bank, an analyst at RBC Capital Markets, points out, cable companies might need to install new set-top boxes and additional customer service support. Such investments could add up if a cable company wanted to reach millions of customers.

Even if that were a viable threat, broadcast networks have an equally powerful option: converting to pay-TV channels. Both CBS CEO Leslie Moonves and 21st Century Fox COO Chase Carey have said they could switch their flagship broadcast networks to pay TV channels in order to be paid for their content. CBS and 21st Century Fox declined to comment for this story.

Of course, such a move also would have its costs. Switching off the broadcast signal would mean losing some of the several million households that don't have pay TV. And it's unclear that there would be a role for local broadcast affiliates if the networks began selling content in the form of national cable channels.

Ultimately, it seems unlikely either cable companies or broadcasters will be eager to overhaul the TV industry. That means there is little reason to expect less revenue from retransmission, even several years down the road.

For CBS, retransmission fees and other fixed payments will become even more important over the next couple of years. Such income is generally considered more attractive to investors than advertising revenue because it's less volatile. With CBS set to complete the split-off of its outdoor division, advertising revenue is expected to fall to 50 percent of the total by 2017, down from the current level of 61 percent, according to Anthony DiClemente, an analyst with Nomura.

What should CBS investors expect when the court ruling arrives? Clearly, it would be better for the company to see the Aereo problem go away entirely. A victory for the start-up would create more uncertainty that would likely send the stock a bit lower. But for those with an eye on the long game, any weakness should be read as opportunity.